RBA hikes for the fourth time this year to 4.60% despite a housing downturn

Four quarter-point moves this year mean the cash rate started the year at 3.60% ^[16]. Even after all four, it sits only about half a point above the 4.1% headline inflation Reuters expects for August ^[12][19]. Against core inflation of 3.6%, the gap is one point ^[20]. Core is 0.6 point above the top of the target range, and the headline forecast is 1.1 points above it ^[17][18].

Energy is the part of the problem a rate hike cannot fix directly. The board said upside risks to inflation were materialising, with energy costs high and productivity weak at home ^[8]. Seoul Economic Daily's report described an energy-driven shock adding to strains on Australia's supply capacity ^[9]. A central bank cannot lower the price of fuel. It can try to stop the pass-through, which the RBA called partial, from spreading to all prices ^[7]. With productivity weak, the only lever it has is demand.

Choosing demand has a cost, and the board accepted it. With housing already in a downturn ^[13] and unemployment at 4.6% ^[14], the bank could have held and let a softer labour market bring prices down over time. It did not wait.

Investors now price at least one more hike ^[15]. Three developments would change that. If the August print comes in below 4.1%, or core eases from 3.6%, the board has room to hold ^[12][6]. Further rises in unemployment from 4.6% would add weight to the jobs side of the decision ^[14]. Cheaper fuel would limit how far the pass-through spreads ^[7].

I think another hike is the more likely next move, and the bank's own numbers support that. A policy rate half a point above headline inflation is thin when that inflation runs 1.1 points over the top of the target ^[19][18]. The counter-case is in the RBA's wording. It said it would "continue to take the steps needed to return inflation to target" ^[4], and it made further increases conditional on being necessary ^[10]. A full point already delivered into a housing downturn may prove to be enough once it feeds through. This view is wrong if core inflation falls below 3.6% over the next few prints and the board holds at its next meeting.